Dover — Increases in Delaware’s personal income tax, gross receipts tax, estate tax and corporate franchise tax were scheduled to expire this year, but legislators voted to keep the increases in place. Democrats, who hold the majority in the House and Senate, say the economy cannot support lower rates.

The Senate on March 28 approved four bills to make increases in the state’s personal income tax, corporate franchise tax, gross receipts tax and estate tax permanent. In all four cases, the 13 Democrats in the Senate voted to approve the increases, while the eight Republican Senators, including four from Sussex County, voted against them.

When the state faced a major budget deficit in 2009, legislators voted to raise or reinstate taxes under legislation that stipulated the increases would be temporary.

All four bills passed in the House March 21. The package of bills now heads to the desk of Gov. Jack Markell.

Markell proposed keeping the taxes in place in January, when he presented his $3.7 billion operating budget. The revenue the bills produce would make up for about half a $56 million deficit in the proposed fiscal year 2014 budget; spending cuts – including a $16 million cut to Farmland Preservation and Open Space programs – would account for the other half.

The top rate on personal income tax went from 5.95 percent to 6.95 percent in 2009. Since then, the rate has been lowered to 6.75 percent. Under House Bill 50, the state’s personal income tax will drop from 6.75 percent to 6.6 percent.

The tax is imposed only on citizens who earn more than $60,000 a year.

Sen. Harris McDowell, D-Wilmington North, said the bill was fair and sustainable. “I think we all know it’s a compromise,” McDowell said.

Sen. Greg Lavelle, R-Sharpley, said it was too early to pass the package of bills. Sen. Gary Simpson, R-Milford, said fiscal year estimates from Delaware Economic and Financial Advisory Council could still go up in the coming months. He asked how the revenue would be spent if estimates went up.

McDowell said the bipartisan Joint Finance Committee would decide how to spend the revenue, but it would likely fund programs which have been cut, such as Open Spaces programs.

Sen. Bob Venables, D-Laurel, who regularly votes with Republicans, said he understands Republicans will vote against the bill, but many of them will oppose because they know it will pass anyway. “We need this money to balance this budget,” he said.

“I’m not really liking the timing on this, and I’m not really liking the word permanent,” Venables said. “But I know it’s got to be done.”

Venables, who was part of the General Assembly that passed the increases in 2009, said, “I feel bad about not keeping a promise…but things didn’t turn out the way some of us thought they might have been.”

House Bill 51 makes permanent the estate tax, which was reinstated in 2009. The tax is levied on a decedent's assets and is not imposed on any estate valued under $5.12 million. All assessed farmland of 10 acres or more is also exempt from the tax.

Lavelle said attorneys in the state have told him millionaires moved out of Delaware because of the tax. He said when wealthy people leave they no longer pay taxes, employ attorneys and accountants or donate to charities.

“I don’t think death should be a taxable event,” Lavelle said.

Simpson asked how many millionaires have left Delaware for states with lower taxes.

House Bill 52 makes permanent the corporate franchise tax, which was enacted in 2009. The bill maintains the maximum franchise tax of $180,000.

Sen. Colin Bonini, R-Dover South, said companies set up shop in Delaware in the past because of its quality of services and low taxes. “I think this has been a cash cow for years and years,” he said. “But this is price-sensitive at some point.”

Bonini said the services in neighboring states are now similar to services Delaware provides for corporations. “I think we need to be very, very careful about damaging our competitiveness with other states,” he said.

McDowell said no corporations in the state have expressed opposition to the bill. “There is a point at which anything becomes price-sensitive,” he said. “We have not reached that point.”

Chief Deputy Secretary of State Rick Geisenberger said Delaware has increased its corporate franchise tax only eight times since the 1930s. “Roughly once a decade,” he said.

House Bill 53 removes a sunset on the state’s gross receipts tax rate. Under HB 53, the current gross receipts tax rate would go down 1 percent for all businesses, and the rate for manufacturing businesses would go down 30 percent.

Businesses that make less than $100,000 per month in gross receipts are excluded from the tax.

Sen. Gerald Hocker, R-Ocean View, owns a number of businesses in the county, including a grocery store and a hardware store. “This is the most unfair business tax that I have ever paid,” he said.

Hocker said Delaware lags behind the national average for new jobs. “When gross receipts first went into affect, I had to cut my payroll,” Hocker said. “This state needs jobs more than ever.”

Cook said there are more than 60,000 businesses in Delaware, and only 8,000 pay a gross receipts tax. He also said the bill increased the monthly exclusion to $100,000 from $80,000, which means thousands more businesses will not have to pay the tax.

Cook said the Tax Foundation rates Delaware 14th in the nation for best business climate.

Together, the four bills will generate $27.9 million in revenue in fiscal year 2014, Cook said. To read the bills, go to delaware.gov.

Comments (2)

Posted by: Peter Harrigan | Mar 29, 2013 13:25

Let this serve as a warning for taxpayers next time the pickpockets in Dover propose a "temporary" tax increase!